Retained earnings are the profits of the business which are kept in the business rather than being dispersed to the owners.
Let’s say a company earns $40,000. The owners take $15,000 of the profits for themselves. They use $25,000 to buy a new panel van for the business. The $25,000 they used to buy the panel van is called retained earnings. Retained earnings means kept profits. They retained or kept $25,000 of the earnings or profits in the business to help it grow. Retained earnings are part of stockholders’ equity.